Avoiding capital gains tax on stocks doesnât have to be difficult. Here are 7 ways to reduce your taxes, from simple to complex, for all types of investors. Last updated:October 22, 2024 XMinute Read
If youâre among the 62% of Americans who are invested in the stock market, your shares have likely increased in value overall for years. Stock appreciation creates value for you as an investor but also results in new responsibilities.
When you sell appreciated stock, you pay a federal tax on the gains, called capital gains tax. As of 2024, you pay anywhere from 0% to 20% in capital gains taxes when you sell appreciated stock, and typically even more if youâve only held the stock for a short time.
Many people rely on investments to build retirement, supplement their income, and build wealth, so they naturally want to minimize the impact of capital gains taxes on their transactions. How?
There are several key strategies (some very easy) to avoid unnecessary capital gains taxes. Weâll start with the easiest and work our way down to the more strategy-intensive options:
The information in this article is provided for educational purposes only and should not be construed as providing legal or tax advice. This information is general in nature and is not intended to serve as the primary or sole basis for investment or tax-planning decisions.
Let’s face it – nobody enjoys paying taxes, especially on hard-earned investment gains. If you’ve watched your stocks grow and don’t want the IRS taking a big chunk when you sell, you’re not alone! I’ve spent years learning the ins and outs of investment taxes, and I’m excited to share some totally legit strategies that can help you keep more of your stock market profits.
Whether you’re a seasoned investor or just getting started, these tax-minimization techniques could save you thousands. Let’s dive into how you can legally reduce or even eliminate capital gains taxes on your stock investments!
Understanding How Stock Taxes Work First
Before we jump into avoidance strategies, you need to understand what you’re actually being taxed on when you sell stocks.
When you sell a stock for more than you paid for it, that profit is called a capital gain The federal government taxes these gains differently depending on how long you owned the asset
- Short-term capital gains: For stocks held 1 year or less – taxed at your ordinary income rate (up to 37%!)
- Long-term capital gains: For stocks held longer than 1 year – taxed at 0%, 15%, or 20% depending on your income
- Additional tax: High-income earners may also face a 3.8% net investment income tax
Understanding this timing difference is crucial because short-term gains are almost always taxed much higher than long-term gains. Now let’s get into the strategies!
Strategy #1: Hold Stocks for More Than a Year
The simplest way to reduce your tax bill is holding your stocks for more than a year before selling. This one move can cut your tax rate dramatically – from as high as 37% down to a maximum of 20% for most investors.
For example, if you’re in the 32% ordinary income tax bracket and have a $10,000 profit on stocks:
- Sell before one year: Pay $3,200 in taxes
- Sell after one year: Pay $1,500 in taxes (at 15% long-term rate)
- That’s $1,700 saved just by waiting!
As Joe Curtin, head of Portfolio Management at Merrill Lynch, points out: “Even a 20% tax may be a small price to pay for success. You can celebrate keeping the 80%.”
Strategy #2: Spread Sales Across Tax Years
If you need to sell a significant position consider spreading the sale across multiple tax years. This can prevent a one-time spike in income that might push you into a higher tax bracket.
For instance, instead of selling $90,000 worth of appreciated stock all at once, you might:
- Sell $30,000 at the end of 2025
- Another $30,000 in early 2026
- The final $30,000 in early 2027
This way, you spread the capital gains across three tax years while completing your sale in just over 12 months.
But remember what Jonathon McLaughlin, an investment strategist for Bank of America, warns: “By waiting to sell, you risk having the stock price fall, reducing your potential gain. The advantages of holding on to those assets may not outweigh the benefits of selling immediately, even if it comes with a greater tax bill now.”
Strategy #3: Manage Your Tax Bracket Strategically
This is where timing gets really strategic. At the lowest income levels, the capital gains tax rate is 0%! That means no federal income taxes on your gains (though state taxes may still apply).
For married couples filing jointly in 2025, the maximum taxable income to qualify for the 0% rate is $96,700. If you’re retired or between jobs, you might be in a lower tax bracket, creating a perfect opportunity to sell appreciated stocks with minimal tax consequences.
Similarly, managing your income to stay under $600,050 (for married filing jointly in 2025) helps you avoid jumping from the 15% to the 20% capital gains rate.
Strategy #4: Harvest Tax Losses to Offset Gains
One of my favorite strategies is called tax-loss harvesting. Here’s how it works:
If some stocks in your portfolio have gone up while others have gone down, you can sell the losers to realize those losses, which can then offset the gains from selling your winners.
For example:
- You sell Stock A for a $10,000 gain
- You sell Stock B for a $7,000 loss
- You only pay taxes on the net $3,000 gain!
Even better, if your losses exceed your gains in a given year, you can deduct up to $3,000 of those excess losses from your ordinary income. Any unused losses can be carried forward to future tax years.
But watch out! If you want to rebuy that losing stock, make sure to wait at least 31 days before repurchasing. Otherwise, the “wash-sale rule” kicks in, and you won’t be able to claim the loss.
Strategy #5: Use Tax-Advantaged Accounts Wisely
One of the best ways to avoid paying taxes on stock gains is to keep them in tax-advantaged accounts like:
Traditional IRAs and 401(k)s
When you sell appreciated stocks within these accounts, you’ll face no immediate taxes. However, you’ll eventually pay ordinary income taxes on all withdrawals during retirement.
Roth IRAs and Roth 401(k)s
These accounts offer the ultimate tax advantage – qualified withdrawals in retirement are completely tax-free! That means all your stock gains can grow and be withdrawn without any federal taxes.
I personally love keeping my most aggressive growth stocks in my Roth IRA, since those potential large gains will never be taxed if I follow the rules.
Strategy #6: Give Appreciated Stocks to Charity
If you’re charitably inclined, donating appreciated stocks instead of cash is incredibly tax-efficient. When you donate stocks you’ve held for more than a year:
- You avoid paying capital gains taxes completely
- You can deduct the full fair market value of the stock (subject to income limitations)
- You can use the cash you would have donated to repurchase the same stock, giving you a higher cost basis
A donor-advised fund can be particularly useful here – you get the tax benefits upfront while having the flexibility to distribute the money to charities over time.
What About Special Situations?
Primary Home Sales
While not stocks, it’s worth noting that when you sell your primary residence, you may exclude up to $500,000 in capital gains from taxes if you’re married filing jointly ($250,000 for singles). This is one of the biggest tax breaks available!
Mutual Funds Have Special Considerations
Mutual funds can create tax headaches because they distribute capital gains to shareholders even if you don’t sell your shares. These distributions are taxable in the year received.
To minimize these surprise tax bills:
- Consider exchange-traded funds (ETFs) which typically have lower capital gains distributions
- Hold actively managed mutual funds in tax-deferred accounts when possible
Estate Planning Considerations
When you leave stocks to beneficiaries in your will, they receive a “stepped-up basis” to the fair market value on your date of death. This means all the appreciation during your lifetime escapes capital gains tax!
However, if you gift appreciated stocks during your lifetime, the recipient takes your original cost basis, preserving the potential capital gains tax liability.
Strategies That Don’t Work (Don’t Be Fooled!)
Some misconceptions about avoiding stock taxes persist:
Reinvesting Dividends Doesn’t Eliminate Taxes
When you reinvest dividends, you still owe taxes on those dividends in the year they’re paid. Reinvestment just increases your cost basis for future sales.
“Like-Kind” Exchanges Don’t Apply to Stocks
While real estate investors can use 1031 exchanges to defer gains, this strategy isn’t available for stocks and securities.
My Final Thoughts
Remember, the goal shouldn’t be to avoid taxes at all costs – it should be to make smart investment decisions that happen to minimize taxes along the way. As the National Wealth Strategies team at Merrill notes, “Any actions you may take should be based on your specific situation and needs rather than your desire to sidestep income taxes.”
I’ve implemented many of these strategies myself and have saved thousands in taxes over the years. My favorite approaches are:
- Holding for long-term gains whenever possible
- Strategic tax-loss harvesting
- Maximizing Roth accounts for growth investments
What strategies will work best for you depends on your individual financial situation, tax bracket, and investment goals. I strongly recommend working with a tax professional who can help tailor these approaches to your specific needs.
Quick Tax-Minimization Checklist
Before selling stocks, ask yourself:
- Have I held this stock for more than one year?
- Am I in a higher tax bracket this year than I expect to be next year?
- Do I have losing investments I could sell to offset these gains?
- Could I donate these shares instead of selling them?
- Would selling specific lots with higher cost basis reduce my gain?
By being strategic about when and how you sell stocks, you can significantly reduce the tax impact and keep more of your investment returns. Remember, it’s not just about what you earn—it’s about what you keep!
Disclaimer: While these strategies are legal, tax laws change frequently. Always consult with a qualified tax professional before implementing any tax strategy. This article is for informational purposes only and should not be considered tax or investment advice.
Have you tried any of these strategies before? Which ones work best for your situation? I’d love to hear about your experiences in the comments below!
Benefit #3: Youâre exempted from certain rules and can rebalance your portfolio.
In later sections, weâll take a look at two specific (but slightly more complicated) investing strategies. In one (tax-loss harvesting), you can amplify your tax savings through stock donations. In the other (cost basis resets and open market buying), you can reduce immediate taxes and save in the long term through a rule exemption enabled by donations.
For savvy investors or those who work with investment advisors, these strategies can deliver a lot of long-term value, so theyâre worth exploring.
So how do stock donations work? To donate stock, first check out FreeWill. Our platform modernizes the process and minimizes the amount of back-and-forth needed between you, your broker, and your chosen nonprofit.
Take a look at our guide to stock donations or browse the supported nonprofits on our stock giving tool to learn more.
Benefits of tax-loss harvesting when donating stock
Take tax-loss harvesting a step further and maximize your tax savings by incorporating charitable donations.
Letâs say you already know you want to donate stock to support a nonprofit, avoid capital gains taxes, and/or fine-tune your portfolio. As weâve seen, there are a few ways you might do this. For some donors, tax-loss harvesting offers the biggest benefits.
Letâs compare the common approaches you might take:
- Tax-loss harvesting and donating
- Holding the stock and donating it directly
- Selling at a loss and then donating cash
- Selling at a gain and then donating cash
In this scenario, imagine you purchased $10,000 of a total stock market ETF that has significantly fallen in value in the past few months. Hereâs how each approach would roughly play out for you:
| Strategy | Taxes Avoided | Deduction for Donation | Total Tax Savings |
|---|---|---|---|
| Tax-loss harvest and donate | $2,890 | $12,000 | $14,890 |
| Donate the stock directly | $740 | $11,260 | $12,000 |
| Sell at a loss and donate cash | $1,225 | $7,500 | $8,725 |
| Sell at a gain and donate cash | -$740 | $11,260 | $10,520 |
Letâs take a closer look at how theyâd work:
- In the first option, you sell the losing shares for a total capital loss (and deduction) of $2,500. This amount will be reported on your taxes and reduce your income for the year. For some earners, you can get up to 49% of the loss back on your tax return; in this case, you could receive $1,225 in tax credits.
- That same day, you purchase $7,500 of a different ETF with a similar composition and that has seen similar performance. These shares increase in value to $12,000 over the next year, representing a capital gain of $4,500. You then decide to donate these shares to charity and avoid the tax youâd pay if you sold (roughly $1,665). Avoiding these taxes â plus the initial tax credit of $1,225 â totals $2,890 in tax savings.
- By following all the steps of this process, youâve locked in three tax benefits: tax-loss harvesting, avoidance of capital gains through donating, and direct tax deductions through donating. Youâll get the full $12,000 deduction for the donation, save $1,665 in capital gains tax, and receive $1,225 in tax credits for the tax-harvested loss.
- In the second option, you hold your original $10,000 ETF investment until it recovers its losses and appreciates to $12,000. If you donate this stock, you save $740 in potential capital gains tax on the $2,000 gain. Youâll also be able to write off the full $12,000 on your taxes as a charitable contribution.
- In the third option, you sell your losing ETF holding and donate the cash to charity. Youâll be able to claim the capital loss and receive tax credits up to $1,225. The charity receives the current cash value of the holding, $7,500, which you can claim as a charitable deduction.
- In the fourth option, you sell the ETF holding and donate the cash after itâs appreciated to $12,000. Youâll then need to pay a capital gains tax of $740. This would result in the charity receiving a total of $11,260 (and you claiming a charitable deduction of the same amount).
Tax-loss harvesting offers a highly beneficial (albeit more complex) way to reduce your tax bill. Mixing in donations adds another layer of benefits: additional tax savings for you and extra support for charities in your community.
Youâre in the best position to identify the right approach for your unique goals, needs, and current performance. The key is to understand your options. Do your research or work with your financial planner or investment advisor if you want to develop a tax-loss harvesting strategy.
And if you want to incorporate charitable giving into your strategy, make sure to save all the necessary documentation for your gifts! You should also understand your repurchasing options after executing a loss-harvesting strategy, as weâll explain below.
How to AVOID Taxes (Legally) When you SELL Stocks
FAQ
How do I avoid paying taxes when I sell stock?
- Spread your investment gains over several years. With an investment that has performed strongly, you might, for example, sell a portion at the end of 2025, another part in 2026 and the remainder early in 2027. …
- Manage your tax bracket. …
- Sell shares with the highest cost basis.
How do I avoid paying tax when I sell shares?
- 1) Use your CGT allowance. …
- 2) Give money or assets to your spouse or civil partner. …
- 3) Don’t forget your losses. …
- 4) Deduct your costs. …
- 5) Increase your pension contributions. …
- 6) Use your ISA allowance – each year. …
- 7) Try Bed and ISA. …
- 8) Donate to charity.
Can you invest in stocks without paying taxes?
Do you pay taxes on stocks you don’t sell? No. Even if the value of your stocks goes up, you won’t pay taxes until you sell the stock. Once you sell a stock that’s gone up in value and you make a profit, that’s when you’ll have to pay the capital gains tax.
How long do I need to hold a stock to avoid taxes?
But if you hold a stock for less than one year before selling it, your gain will typically be taxed at your ordinary income tax rate. If you sell assets throughout the year, it’s important to accurately maintain those records so you can properly report and pay taxes on your gains.